2 Corporation a legal entity,distinct and separate from the individuals who create and operate itcan acquire, own, and dispose of property in its own nameSells shares of ownership called _________The stock of the corporation is owned by _____________________.

9 Formation of corporationFile application of incorporation with the stateOrganize in the state with the most favorable laws (Delaware)

10 Formation of corporationFile articles of incorporation with the stateFormally creates the corporationStates authorized shares: maximum # of shares the corporation is allowed to issueStates par value: arbitrary amount used to record common stock

11 Initial public offeringSelling shares of stock to investors to raise capital for the businessUnderwriter helps corporation with this

12 Shares of stockIssued shares: shares that have been transferred to shareholders=Outstanding shares: shares that are still being held by shareholders+Treasury shares: shares that the corporation has bought back from shareholders

13 Classes of stock Common stock: carry voting rightsRank behind creditors and preferred stockholdersPreferred stock: have a preference for dividends – receive a certain amount of dividends before common stockholders can receive any dividends

22 Issuance of stock for noncash assetRecord assets received at their fair market valueif assets’ fair market value is not known, record the assets at the stock market value

23 Issuance of stock for noncash assetEx. Issued 10,000 shares of $10 par common stock for Land with a fair market value of $200,000. Stock market price = $17 per shareDr. Cr.What would the journal entry be if the Land’s fair market value cannot be determined?

26 Declaration of dividendDistribution to shareholdersDeclared by the Board of DirectorsOnce declared, become a legal obligation upon declarationOnly paid on outstanding shares (not on treasury shares)

31 Cash Dividend ExampleEspinoza Corporation is authorized to issue $ par value common stock. It has 160,000 shares issued and 140,000 shares outstanding. On June 5, the Board of Directors declared a cash dividend of $ .50 per share to be paid on June 25 to stockholders of record on June 15.

32 Stock Dividend Distributes shares to stockholdersDone to reward stockholdersTransfers amount from retained earnings to contributed capitalDoes not change total stockholders’ equityUsually accounted for at market priceWill affect market price, because now there are more shares outstanding

43 Stock Split New number of shares: Number of shares before the splitX amount of split= Number of shares after the split

44 Stock Split New Par value Par value before the splitDivided by the amount of the split= the par value after the split

45 Stock Split Example: Corporation has 10,000 shares with a $4 par value2 for 1 stock split is declared# of shares ParBefore the splitAfter the split

46 Preferred StockDividends rights may be stated in monetary terms or as a %Monetary terms: $2 preferred stock means that each share will receive a $2 per share annual dividendPercentage: Annual Dividends calculated as par value X %

47 Preferred Stock Cumulative preferred stockIf dividends aren’t paid in the current year, they carry forward to the next yearDividends in arrears: dividends that have carried forward from the previous yearPreferred stockholders must be paid the current dividends + dividends in arrears before common stockholders receive any dividendsAfter Preferred stock dividends are paid in full, the common stockholders receive the rest of the dividends

48 Preferred Stock Noncumulative preferred stockIf dividends aren’t paid in the current year, they are lost

49 Preferred Stock Dividend ExampleCormer Corporation has 20,000 shares of $100 par, 6% cumulative preferred stock and 60,000 shares of $10 par value common stock. Calculate the total dividends and dividends per share on preferred stock and common stock, if dividends paid in 2006 – 2009 are $80,000, $60,000, $180,000 and $300,000.

50 Preferred Stock Dividend ExampleJackson Corporation has 10,000 shares of $50 par, $2 cumulative preferred stock and 20,000 shares of $10 par value common stock. Calculate the total dividends and dividends per share on preferred stock and common stock, if dividends paid in 2007 – 2010 are $10,000, $15,000, $40,000 and $300,000.

51 Treasury stockStock that has been issued to shareholders and then reacquired by the corporationReasons why company buys treasury stock:

52 Treasury stockStock that has been issued to shareholders and then reacquired by the corporationReasons why company buys treasury stock:

56 Sale of Treasury stockAfter the company has held treasury stock, it may decide to sell the stock againTreasury stock can be sold for the same price it was purchased forDr Cr.Cash # of sh X selling priceTreasury stock # of sh X cost

57 Sale of Treasury stockAfter the company has held treasury stock, it may decide to sell the stock againTreasury stock can be sold for more than it was purchased forCash # of sh X selling priceTreasury stock # of sh X costPaid in capital, treasury difference

58 Sale of Treasury stockAfter the company has held treasury stock, it may decide to sell the stock againTreasury stock can be sold for less than it was purchased forCash # of sh x selling pricePaid in capital, treasury differenceTreasury stock # of sh X cost

59 Sale of Treasury stockEx.: On Mar. 1, sold 500 of the treasury shares that were purchased for $15 on Feb. 1. The selling price on Mar. 1 was $17.Dr Cr.

60 Sale of Treasury stockEx.: On Mar. 15, sold the remaining 500 treasury shares that were purchased for $15 on Feb. 1. The selling price on Mar. 15 was $12.Dr Cr.

63 Restriction on Retained EarningsAlso called AppropriationsMakes a portion of retained earnings unavailable for distributing dividendUsually reported in the Notes to the Financial Statements

64 Prior period adjustmentCorrection of error from math mistake or wrong application of accounting principle that isn’t discovered in the period it occurredReported as an adjustment to the beginning balance of Retained Earnings